Trend analysis offers a measurable and verifiable method for businesses to project future outcomes. It can be used for failure analysis and as an early warning indicator of impending problems. Where accurate historical information exists and valid relationships between variables can be established, trend analysis is a precise tool for anticipating events. Trend analysis is used to forecast market trends, sales growth, inventory levels and interest rates.

Laying the Groundwork

Business owners don't have lots of time to spend forecasting and keeping those forecasts current. While forecasting is not as urgent as managing day-to-day operations, a company needs to forecast for growth and to anticipate problems. To evaluate the effectiveness of trend analysis, you need to consider all of its components -- seasonal, cyclical and long-term trends. While promotional discounts and clearance sales might bring in revenue in the short term, a business can't ignore long-term trends.

Trend Analysis Forecasting

Trend analysis uses a variety of statistical tools, all of which are accessible to business owners. At the most basic level, you can plot data points for visual identification of trends to clarify relationships between variables and identify “outliers,” or random points that don't fit a pattern. Data points can then be converted into moving averages to smooth random fluctuations. A business owner can use spreadsheet software to “fit” trend lines on charted data or build regression models. These allow her to include more variables to predict sales more accurately and forecast the impact of rising interest rates and seasonal changes.

Pros

With the widespread availability of data in virtually every field and the computer’s capability to process it, applications for trend analysis seem almost limitless. Since a trend analysis is based on verifiable data, it can be subjected to thorough scrutiny for validation. The use of numbers makes the analysis more exacting. A trend analysis can be replicated, checked, updated and refined when necessary.

Cons

Historical data may not give a true picture of an underlying trend. An obvious event like hurricanes Katrina and Sandy will distort a normal business trend line, while others are more subtle. A major problem in forecasting trends involves identifying turning points. With hindsight, turning points are clearly visible, but it can be difficult to tell in the moment whether they are mere aberrations or the beginning of new trends. Long-term projections need more data to support them, and that may not always be available, particularly for a new business or product line. In any case, the further out one forecasts, the greater the possibility for error, because the passage of time will inevitably introduce new variables.

About the Author

Thomas Metcalf has worked as an economist, stockbroker and technology salesman. A writer since 1997, he has written a monthly column for "Life Association News," authored several books and contributed to national publications such as the History Channel's "HISTORY Magazine." Metcalf holds a master's degree in economics from Tufts University.